Expert Insights

Three ways to put your bonus to work Cash windfalls can have the power to supercharge your savings goals. Year-end bonuses are a blessing. And while there’s no guarantee you’ll get one—just ask Clark Griswold—if you do, they can have the power to supercharge your savings goals. So while you wait for that bonus cash, read up on three ways to handle small cash windfalls such as these. Go 50/50: Treat yourself now and save for the future Let’s address the elephant in the room: A lot of us spend the bulk of our bonuses. But there’s a psychological workaround to this temptation: Think of yourself as two people. There’s “present-day” you, flush with cash and eyeing a few items on your wish list. Then there’s “future” you and all of their dreams for major purchases or financial freedom. Since both of you can rightly lay claim to your bonus, the only fair thing to do is split it 50-50. So go ahead: Splurge guilt-free with one half of your bonus, and save the other half. Tax-savvy saving: Use your bonus to get a tax break A lot of companies withhold taxes on bonuses at the IRS-recommended rate of 22%. Less commonly, some companies lump it in with your regular paycheck, and your regular withholding rate applies. Either way, and contrary to popular belief, bonuses aren’t taxed at a higher rate. But seeing your bonus shrink due to any amount of taxes is still rough. Thankfully, you may able to minimize your tax hit with the help of a tax-advantaged retirement account: Boost your 401(k) contributions. In some cases, companies allow employees to make 401(k) contributions with their bonuses. If that’s the case for you, consider funneling “future” you’s half of your bonus into your traditional or Roth 401(k), up to the IRS limits. Traditional for a tax break now, Roth for a tax break later. Max out your IRA. Depending on how much income you make, you may be eligible to deduct traditional IRA contributions from your taxes and/or contribute after-tax dollars to a Roth IRA for a tax break later. Better yet, you have until Tax Day of 2024 to max out your 2023 IRA! Stash the cash: Start earning interest today Tax breaks aren’t the end-all, be-all, of course. In some scenarios, saving your bonus in a high-yield cash account like our Cash Reserve account might take priority. If you lack an emergency fund, for example, or if you’re planning for a major purchase in the near future. However you save or invest your bonus, rest easy knowing you’re striking a good balance between today and tomorrow. Unless your bonus came in the form of jelly, in which case you’re on your own, Clark.

Backdoor Roths and beyond: The four camps who can benefit Roth IRA conversions can unlock serious savings, especially if you find yourself in one of these scenarios. Roth IRAs and their tax-free perks are pretty great—so great that in some scenarios, it can make sense to convert pre-tax dollars from traditional retirement accounts into post-tax dollars in a Roth IRA. This is what’s known as a Roth conversion. You’re effectively taking those pre-tax funds and telling Uncle Sam you’d rather pay taxes on them now in exchange for the benefit of tax-free and penalty-free withdrawals in retirement. And if you need the money earlier, the IRS requires only that you wait five years before withdrawing each conversion to avoid a 10% penalty. So who do Roth conversions appeal to in particular? Four types of people: High earners and the “backdoor” Roth conversion Recent retirees and unwelcome RMDs Early retirees and the Roth conversion “ladder” People experiencing temporary income dips High earners and the “backdoor” Roth conversion Did you know the IRS restricts access to Roth IRAs based on income? Shut the front door! Yes, if your income exceeds these eligibility limits, you can’t contribute directly to a Roth IRA. But as the saying goes, when one door closes, another door opens. A “backdoor,” more specifically. So if you make too much money, fear not – you can contribute indirectly to a Roth IRA via a Roth conversion widely known as a “backdoor” Roth. This entails contributing post-tax dollars first to a traditional IRA, then converting those funds to a Roth IRA. If you’ve never contributed to a traditional IRA before, pulling off a backdoor Roth can be simple, especially if you use Betterment. Open both a traditional and Roth IRA with us, fund the traditional, then convert those funds to your Roth IRA once they’ve settled. Done! If you have any existing traditional IRA funds, however, things get a little more complicated due to something called the pro rata rule. In short, you need to move any pre-tax dollars out of your traditional IRA(s) into an employer-sponsored retirement account like a 401(k) before you can use the account as a backdoor. This gets even more complicated if you have both pre- and post-tax dollars mixed together in your traditional IRA(s). Before going down the road of a backdoor Roth conversion, or any Roth conversion really, we highly recommend seeking the advice of a financial advisor, as well as a tax advisor in certain cases. They can help assess both your current situation and future projections. Recent retirees and unwelcome RMDs The IRS doesn’t let you keep funds in your traditional retirement accounts indefinitely. They’re meant to be spent, after all. So starting at age 73, annual required minimum distributions (RMDs) from these accounts kick in. RMDs aren’t inherently a bad thing, but if your expenses can already be covered from other sources, RMDs will just raise your tax bill unnecessarily. You can get ahead of this and lower your future amount of RMDs by converting traditional account funds to a Roth IRA before you reach RMD age. That’s because Roth IRAs are exempt from RMDs. And as an added benefit, you’ll minimize taxes on Social Security benefits and Medicare premiums later on in retirement. Just make sure you convert those funds before you turn 73, because once RMDs kick in, those amounts can’t be converted. Early retirees and the Roth conversion “ladder” If you want to retire early, even by “just” a few years, you very well might encounter a problem: Most of your retirement savings are tied up in tax-advantaged 401(k)s and IRAs, which slap you with a 10% penalty if you withdraw the funds before the age of 59 ½. A few exceptions to this early withdrawal rule exist, the biggest for early retirees being that contributions to a Roth IRA (i.e., not the gains you may see on those contributions) can be withdrawn early without taxes or penalties, in this specific order: “Regular” contributions made directly to a Roth IRA. As an aside, you can always withdraw these funds tax-free and penalty-free without waiting five years. Once you’ve burned through regular contributions, the IRS allows you to withdraw contributions that were converted from traditional 401(k)s and traditional IRAs! You won’t pay any additional taxes on these withdrawn contributions because taxes have already been paid. But withdrawn conversions (item #2 above) typically are still subject to a 10% penalty if withdrawn before 5 years. Think of this rule as a speed bump in an otherwise swift shortcut. So what does all of this mean for early retirees? Starting five years before they plan on retiring, they can create a “ladder” looking something like the table below (note: dollar amounts are hypothetical). They convert funds each year, pay taxes on them at that time, then withdraw them five years later 10% penalty-free and sans any additional taxes. Time Amount converted Amount withdrawn Source of withdrawal 5 years pre-retirement $40,000 $0 N/A 4 years pre-retirement $40,000 $0 N/A 3 years pre-retirement $40,000 $0 N/A 2 years pre-retirement $40,000 $0 N/A 1 year pre-retirement $40,000 $0 N/A Retired early! 🎉 Year 1 of retirement $40,000 $40,000 5 years pre-retirement Year 2 of retirement $40,000 $40,000 4 years pre-retirement Year 3 of retirement $40,000 $40,000 3 years pre-retirement Year 4 of retirement $40,000 $40,000 2 years pre-retirement Year 5 of retirement $40,000 $40,000 1 year pre-retirement Etc. Etc. Etc. Etc. People experiencing temporary income dips Say you find yourself staring at a significantly smaller income for the year. Maybe you lost your job. Maybe you work on commission and had a down year. Or maybe you had a big tax writeoff. Whatever the reason, that dip in income means you’re currently in a lower tax bracket, and it may be wise to pay taxes on some of your pre-tax investments now at that lower rate compared to the higher rate when your income bounces back. Watch out for potential Roth conversion pitfalls Each of these scenarios requires careful tax planning, so again, we recommend working with a trusted financial advisor and/or tax advisor. They can help you avoid the most common Roth conversion mistakes and take full advantage of this post-tax money maneuver. Our CERTIFIED FINANCIAL PLANNER™ professionals are here to offer on-demand guidance.

What’s in store for the market in 2024? A look at how the market might fare in the months ahead. “Predicting is very difficult,” the physicist Niels Bohr once said. “Especially about the future.” With the benefit of hindsight, we now know that many of the predictions made about the economy a year ago missed the mark. Decades-high inflation, sparked by the pandemic, had pushed monetary policymakers to aggressively hike interest rates. Many analysts expected those higher rates to slow the economy, with a recession likely right around the corner. But thus far, the recession remains a mirage. And it may not feel like it, but broadly-speaking the economy did alright in 2023: Inflation slowed in the U.S., from 7.1% to 3.1% year over year1 U.S. stocks rebounded, up 23.9% in 20232 Employment remained strong 1Consumer Price Index data. Source: BLS, FRED, Bloomberg. 2CRSP U.S. Total Stock Market Index data through December 13th, 2023. Source: Bloomberg. For savers and investors, this illustrates the significance of not allowing short-term fears and economic tremors to distract from the discipline of allocating money to a diversified portfolio of financial assets and keeping an eye on the long-term. Just as deciding to sell stocks in 2020 due to the pandemic’s effect on the market would have caused one to miss out on the 2021 bull market, selling in 2022 based on recessionary fears would have prevented exposure to 2023’s gains. So once again: Predicting is very difficult. Yet now we train our eyes, humbly so, on 2024 and offer our analysis on where the market is headed. Reasons for optimism The Fed repeatedly raised rates over the last two years to slow spending and bring inflation back under control. So while rates remain high, inflation is looking better and, encouragingly, appears set to drop to the 2% annual rate targeted by policymakers. In fact, we think inflation has the potential to fall even lower when you look at housing costs like rent, whose spikes and dips take a while to show up in metrics like the Consumer Price Index (CPI). That’s not the same thing as saying prices are falling (deflation, in other words), but they’ve stopped increasing as quickly as they were before. Lower inflation, as a result, could lead to flat or even falling interest rates in 2024, potentially taking our foot off the brake of the economy and supporting growth. With inflation dampened, monetary policymakers would be less compelled to push borrowing costs higher to curtail demand—a shift that would support a longer runway for economic expansion. Benign inflation and relatively less restrictive financial conditions could also benefit the stock market in the near term, with expectations for continued consumer spending—and higher corporate earnings—fueling stock prices. Back in October 2023, for example, inflation came in surprisingly flat, leading one index made up of smaller companies to jump 5% in a single day. And for now, with interest rates at historically-high levels, bonds also offer opportunities for investors. Reasons for caution Yet the economy and markets still face risks in 2024. Something as large and unwieldy as the economy, and major actions like the Fed’s many rate hikes, can take years to be felt. For example: A recent study by the Federal Reserve Bank of San Francisco based on a range of global economies estimates that, four years after an unexpected 1% increase in a country’s policy interest rate, real GDP would be on average about 2% lower than it would otherwise be and 5% lower after 12 years. Because of this, it could very well be sometime in 2024 when economic activity starts to buckle under the weight of rate hikes that began in March 2022. Now we’re getting a little wonkier: The ongoing threat of a recession would weigh on market returns, but if inflation remains at current levels at the time it occurs and the government still runs a large deficit, monetary and fiscal stimulus in response to a downturn may not be at a scale hoped for by investors. In the event consumers pull back on their spending, expectations for corporate earnings that have supported the performance of the stock market (see Figure 3) would also suffer. The pricing power companies have recently enjoyed amidst the inflationary environment would likely erode, hitting their bottom lines as well, and potentially driving down stocks. So what now? The best plan of action during uncertain times is often no action at all. The risks associated with a down cycle exist alongside the opportunity of a growth cycle. Look no further than the last three years. The current elevated yields in bonds markets also offer opportunities for investors. If you find yourself sitting on too much cash, now might be the time to act and put it to work in the market. You can invest it as a lump sum, which research shows may offer higher potential returns over time. Or you can sprinkle it into a portfolio over time. (We make it easy to invest funds from your Cash Reserve account, either way.) And however the market performs in 2024, you should remain confident that investing can help you reach your financial goals in the long-term.

Two timeless tips from a legendary investor Warren Buffett may be the greatest investor to ever live. But his mentor is a legend with some timeless advice for all of us. Warren Buffett’s mentor was Benjamin Graham. He wrote two of the most famous investing books ever written, with his most well-known book being The Intelligent Investor. The book was published in 1949 and his advice is still relevant today. If you don’t want to read Graham’s hundreds of pages of investment advice, don’t worry, we’ve summarized a couple of our favorite tips for you. Tip 1: Know what type of investor you are. Graham warned of, “...speculating when you think you are investing…” Graham divided investors into two camps: Defensive and aggressive investors. Both need to be cautious of becoming speculators, throwing money into the “hot” stocks of the moment. Defensive, or passive, investors want to avoid serious losses and the need to make frequent investing decisions. Aggressive, or active, investors have a willingness to devote time and care, and hopefully skill, to the selection of individual investments. Most people lean towards passive investing, but either way, avoid the temptation to speculate, especially unplanned speculation during market crazes (ahem, meme stocks). Tip 2: Be comfortable with market volatility. Graham writes, “Every investor who owns common stock must expect to see them fluctuate in value over the years.” When thinking about stock market volatility—the ups and downs of the market—consider this summary of Graham’s advice: Avoid timing the market. Graham was a big believer that it was nearly impossible for the general public to be successful at timing the market. We couldn’t agree more. You don’t need to watch your portfolio’s performance “like a hawk” as Graham wrote. Simply check it from time to time throughout the year to make sure your strategy aligns with your long-term investing goals. Bonus tips: For passive investors weathering a volatile market, Graham recommends (so do we!) the following investing approaches: Invest in low-cost funds: Look for well-diversified portfolios pre-built by experts to save you time. Use dollar-cost averaging: Consider depositing the same amount of money at fixed intervals (weekly, monthly, etc) over a period of time.

Three steps to size up your emergency fund Strive for at least three months of expenses while taking these factors into consideration. Imagine losing your job, totaling your car, or landing in the hospital. How quickly would your mind turn from the shock of the event itself to worrying about paying your bills? If you’re anything like the majority of Americans recently surveyed by Bankrate, finances would add insult to injury pretty fast: 57% | Percentage of U.S. adults currently unable to afford a $1,000 emergency expense In these scenarios, an emergency fund can not only help you avoid taking on high-interest debt or backtracking on other money goals, it can give you one less thing to worry about in trying times. So how much should you have saved, and where should you put it? Follow these three steps. 1. Tally up your monthly living expenses — or use our shortcut. Coming up with this number isn’t always easy. You may have dozens of regular expenses falling into one of a few big buckets: Food Housing Transportation Medical When you create an Emergency Fund goal at Betterment, we automatically estimate your monthly expenses based on two factors from your financial profile: Your self-reported household annual income Your zip code’s estimated cost of living You’re more than welcome to use your own dollar figure, but don’t let math get in the way of getting started. 2. Decide how many months make sense for you We recommend having at least three months’ worth of expenses in your emergency fund. A few scenarios that might warrant saving more include: You support others with your income Your job security is iffy You don’t have steady income You have a serious medical condition But it really comes down to how much will help you sleep soundly at night. According to Bankrate’s survey, nearly ⅔ of people say that total is six months or more. Whatever amount you land on, we’ll suggest a monthly recurring deposit to help you get there. We’ll also project a four-year balance based on your initial and scheduled deposits and your expected return and volatility. Why four years? We believe that’s a realistic timeframe to save at least three months of living expenses through recurring deposits. If you can get there quicker and move on to other money goals, even better! 3. Pick a place to keep your emergency fund We recommend keeping your emergency fund in one of two places: cash—more specifically a low-risk, high-yield cash account—or a bond-heavy investing account. A low-risk, high-yield cash account like our Cash Reserve may not always keep pace with inflation, but it comes with no investment risk. An investing account is better suited to keep up with inflation but is relatively riskier. Because of this volatility, we currently suggest adding a 30% buffer to your emergency fund’s target amount if you stick with the default stock/bond allocation. There also may be tax implications should you withdraw funds. Your decision will again come down to your comfort level with risk. If the thought of seeing your emergency fund’s value dip, even for a second, gives you heartburn, you might consider sticking with a cash account. Or you can always hedge and split your emergency fund between the two. There’s no wrong answer here! Remember to go with the (cash) flow There’s no final answer here either. Emergency funds naturally ebb and flow over the years. Your monthly expenses could go up or down. You might have to withdraw (and later replace) funds. Or you simply might realize you need a little more saved to feel secure. Revisit your numbers on occasion—say, once a year or anytime you get a raise or big new expense like a house or baby—and rest easy knowing you’re tackling one of the most important financial goals out there.

Life and taxes, not death and taxes Taxes aren’t fun but your life should be. We’ve got a couple of tools to help with taxes. See if they’re right for you. Benjamin Franklin once said, "In this world, nothing can be said to be certain, except death and taxes." At Betterment, we prefer a more optimistic take: Nothing is certain, except life and taxes. And we want to help you live a better life by helping you save money on taxes as you invest. The main idea: Unlike many investment managers, we automate advanced tax-efficient strategies, making life easier if the features are right for you, including: Tax Loss Harvesting+ (TLH+) Tax Coordination Let’s see how each strategy works. What is TLH+? TLH+ seeks to increase the annual returns in a taxable account by automating an advanced tax-saving strategy. When investments lose value, Betterment looks for opportunities to sell them to help offset the taxes that come with income and capital gains. You can offset up to $3,000 of your ordinary income each year with tax losses. TLH+ coordinates harvests across your household’s Betterment accounts, including IRAs, 401(k)s, joint accounts, and trusts. What is Tax Coordination? Tax Coordination is designed to optimize and automate a strategy called asset location. It organizes your portfolio so that the highest-tax assets go into the accounts with the biggest tax breaks. Using Tax Coordination can help you make the most out of every dollar you invest for retirement because it is designed to minimize your tax liability while maximizing your after-tax returns. Tax Coordination only manages accounts held at Betterment within a retirement goal, so it may be worth considering your personal situation and if rolling over an IRA or 401(k) prior to adding a taxable account is the right call for you. The big picture: Taxes aren’t fun but your life should be. So we do our best to automate these advanced tax strategies for you. Want to see if these tax-efficient strategies are for you? Log in to your Betterment account from a web browser and navigate to the “Performance” section. You can learn more about TLH+ and Tax Coordination and turn them on if they’re right for you.